Monday, October 31, 2011

Opportunity Cost for thee, but not for me

In a number of posts, I have alluded to the fact that Krugman denies that the Law of Opportunity Cost and the Law of Scarcity apply when the economy supposedly is in a "liquidity trap." Today, he seems to give some credence to real-live economic laws (as opposed to the stuff made up by J.M. Keynes), although he does not apply those laws evenly, which I guess is OK in the rarified air of the Princeton economics department.

His post continues the "weaponized Keynesianism" theme covered in a blog post earlier, and at one level, I agree with him. When a Republican makes the claim that cutting military spending will hurt the economy because it eliminates military-connected jobs, but yet claims that a "stimulus" either will have no effect or will be harmful, then he or she needs to be called out on that contradiction, and Krugman has every right to do it.

One of the reasons I cannot support most of the Tea Party candidates is that they support both the police state at home and military empire abroad, and both are destructive. (I'd say that they were destructive to a "free society," but our society long ago stopped being free, thanks to a tag-team effort by the Right and the Progressives.) Military spending that supports invasions abroad is destructive because it does not protect the people of this country, instead making them more vulnerable to revenge attacks from disaffected peoples abroad.

For that matter, I would much rather see a United States as a country where entrepreneurs are free to pursue ideas rather than the country it has become: a nation of people getting rich by being politically-connected with a gargantuan government that is increasingly protecting itself by means of utter brutality against innocent people who are deemed as "threats" to the existing order. If one wishes to invoke the term "sustainability," this is the perfect situation.

Unfortunately, Krugman takes another road and at the same time exposes his partisan viewpoints that masquerade as "economic" analysis. He writes:
...there are also darker motives behind weaponized Keynesianism.

For one thing, to admit that public spending on useful projects can create jobs is to admit that such spending can in fact do good, that sometimes government is the solution, not the problem. Fear that voters might reach the same conclusion is, I’d argue, the main reason the right has always seen Keynesian economics as a leftist doctrine, when it’s actually nothing of the sort. However, spending on useless or, even better, destructive projects doesn’t present conservatives with the same problem.
I'm not sure that Krugman really needs to play the role of the Official Psychoanalyst of the Right, but from what I can see, the Right is being consistent in that people from that political perspective believe that government should "protect" us from assaults from abroad, and in their view, military spending performs that duty. Many of us on the libertarian front argue, however, that the current direction of military spending does NOT fall into that "protect us" category, even if the original premise -- that government should protect us -- is correct.

Unfortunately, he then veers into a non sequitur that cries out for a response:
Beyond that, there’s a point made long ago by the Polish economist Michael Kalecki: to admit that the government can create jobs is to reduce the perceived importance of business confidence.

Appeals to confidence have always been a key debating point for opponents of taxes and regulation; Wall Street’s whining about President Obama is part of a long tradition in which wealthy businessmen and their flacks argue that any hint of populism on the part of politicians will upset people like them, and that this is bad for the economy. Once you concede that the government can act directly to create jobs, however, that whining loses much of its persuasive power — so Keynesian economics must be rejected, except in those cases where it’s being used to defend lucrative contracts.
What Krugman is saying here is that it does not matter if government blocks efforts of entrepreneurs and private business firms because, after all, government can easily replace the private economy through massive spending, financed by borrowing and monetary "creation." Thus -- and his logical construct really stretches credulity here -- if someone makes the claim that cutting military spending is bad because it eliminates certain jobs, that is "proof" that massive government regulations and control do not have any kind of negative effect.

Furthermore, throughout the article, he seems to be saying that government spending on military items prevents government spending elsewhere, an Opportunity Cost situation. Yet, Krugman has been arguing that government spending can be limitless (or close to it) in a "liquidity trap," so it would seem to me that if Krugman wanted to be consistent, he would say that we can have it all, both Military Keynesianism and Civilian Keynesianism.

So, we see The Great One invoking Opportunity Cost on one side of the ledger, but not on the other. This is pretty typical of his "analysis," which is unfortunate, given that some people think that Krugman is writing about economics, which is not the case. He is a political operative, period.

40 comments:

Pete said...

1/2

I think I have discovered an easy way to expose the deep contradiction inherent in the core of Keynesianism.

They claim that the whole point of Keynesian stimulus is to boost government spending when unemployment and idle resources are "high," and once the economy "recovers" after said spending, the intention is to reduce government spending back down. This is the intention, but can it work?

Well, it should first be noted that government spending doesn't consist of spending money everywhere on everything. All government spending, no matter what it is, consists of specific choices and values (from the government) of specific spending in specific areas of the economy. So boosting government spending during high employment and idle resources is really a call to spend money in specific areas of the economy but not others, and those specific areas are where currently unemployed workers and currently idle resources can be put into specific uses, which are necessarily in line with the government's specific spending patterns. If it's bridge and missile construction, then previously unemployed labor and previously idle resources are going to be "crystalized" in a specific orientation. In addition, should there be any multiplier effect, the government's original specific spending will also lead to a change in the orientation of already existing employment and already used resources.

Importantly, since the Keynesian claim is that those unemployed workers and idle resources would remain unemployed and idle if it were not for the government's spending, then we must conclude that once the workers and resources are actually put into use in those particular purposes in line with the government's specific values and spending, then those workers and resources could only remain in use by virtue of that government spending, and any reduction of that spending will result in those workers and resources becoming unemployed and idle once more. After all, the consumers have already allegedly decided through their spending patterns that these unemployed workers and idle resources are not where the consumers want them, so the Keynesians believe that the government is supposed to "step in" and "replace" that lost demand.

There is a contradiction with this, and it is when the Keynesian answers the question: "After the previously unemployed workers and idle resources are put into "motion", why isn't there another wave of unemployment and idle resources once the government decreases its spending back down after the economy "recovers" in the future"?

Pete said...

2/2


When they answer this question, every single Keynesian I have ever spoken to all of a sudden becomes a believer of the market process, and they make "Austrian" arguments.

"Well, after the economy recovers, the government can decrease its spending, and the drop in demand from government won't matter because the workers and resources are active enough that they will just move away from where they were due to "government + market" spending, and go to where the "market" is spending.

But how can this be? If the original Keynesian claim was that the prior drop in market spending supposedly caused the initial wave of unemployment and idle resources that required government spending in the first place, then why couldn't the available workers and resources back then get devoted and put to use in line with the lower market demand?

On the one hand the Keynesian claims that full unemployment and full resource utilization can be had with a reduced demand from a group of people (i.e. government). But on the other hand the Keynesian claims that full employment and full resource utilization cannot be had if there is a reduced demand from a group of people (i.e. the citizens).

They want to believe that when the government reduces its demand, it does not lead to unemployment and idle resources. But they also want to believe that when the market reduces its demand, it does lead to unemployment and idle resources.

This contradiction is unbridgeable. This contradiction is exactly why the Keynesian resorts to faith and magic when they try to explain why a reduction in government demand in the future won't lead to a rise in unemployment and idle resources once again for the workers and resources devoted to the specific purposes that such government spending made worthwhile in the first place.

I just use their crap logic against them: If they believe that once the economy "recovers," the government can reduce its demand and yet all those workers and resources that were crystalized into that specific demand can somehow find new uses according to the newly freed up market process, then they contradict themselves because they previously claimed the market process was not capable of doing this in the past, which allegedly necessitated the government spending in the first place!

Keynesians only want to be Austrians in the future, so that they don't have to be Austrians in the present where it matters.

Anonymous said...

You've left me scratching my head. You seem very good at explaining Krugman's view. And then you just stop. No killer blow, no apparrent refutation. It is really frustrating for someone like myself who comes here wanting to see you pick the likes of Krugman apart. I guess its me - not knowing enough about economics.

William L. Anderson said...

I pretty much will stop at Opportunity Cost, since that is the bedrock of economic analysis. Krugman pretty much claims that OC does not hold in a "liquidity trap," which is another way of saying that in certain situations, the Law of Scarcity does not hold. That is ridiculous on its face and does not need my refutation! It refutes itself.

That the Great Learned Minds of Economics can still claim this guy is an economist is a commentary on the sad state of academic economics.

Anonymous said...

Professor Anderson: True or False- opportunity cost is substantially lessened when resources are currently sitting idle?

Its my understanding that opportunity cost applies when doing one thing prevents you from doing another. If the resources you employ are sitting idle, doesn't that mean the opportunity cost is very low?

It seems to me that Krugman's point, "opportunity cost is low in a liquidity trap" can be rewritten as "opportunity cost is low when unemployment is high and capital isn't being utilized." That point seems almost trivially true.

Tom said...

Prof. Anderson, I would be interested in what you think of this back and forth between Russ Roberts and Karl Smith on the topic of aggregate demand. More specifically about what Karl Smith says. Can you critique the last response?

http://cafehayek.com/2011/10/i-dont-understand-aggregate-demand.html

http://modeledbehavior.com/2011/10/27/russ-roberts-and-aggregate-demand/

http://cafehayek.com/2011/10/aggregate-demand-ii.html

http://modeledbehavior.com/2011/10/28/more-on-aggregate-demand/

William L. Anderson said...

I tend to agree with Roberts. Aggregate demand is fictitious, just as is aggregate supply. The idea that we can add all the demand for goods and services and add the entire supply of goods and services and put them into two equations is a howler.

As for "idle resources," we have to ask why those resources are idle in the first place. The Keynesians argue that a lack of "aggregate demand" causes the unemployment to occur, while the Austrians say that the problem beings with malinvestments.

To a Keynesian, there is no such thing as a malinvestment. That is why they really cannot even speak of financial bubbles, since, after all, it is just good, old, aggregate demand, and if people want to throw lots of money at houses, well that is just great.

(I need to do a post on this because I have been thinking about the logical disconnect between Keynesians and bubbles for a while.)

Tom said...

"As for "idle resources," we have to ask why those resources are idle in the first place. The Keynesians argue that a lack of "aggregate demand" causes the unemployment to occur, while the Austrians say that the problem beings with malinvestments.

To a Keynesian, there is no such thing as a malinvestment. That is why they really cannot even speak of financial bubbles, since, after all, it is just good, old, aggregate demand, and if people want to throw lots of money at houses, well that is just great."

Does monetary disequilibrium play any role in your thinking? Can there ever be (or has there ever been)a recession do to an excess demand for money? Does monetary disequilibrium have anything to do with this recession, at least partially?

Anonymous said...

Professor, why does it matter WHY resources are idle when it comes to opportunity cost? It can't all be "malinvested" capital (recent college grads haven't had time to malinvest themselves).

Lets not bring aggregate demand into this- lets just ask a simple question: is there opportunity cost (as opposed to just cost) to employing an idle resource? Krugman says no, you say yes. Please actually explain where the opportunity cost is in employing these resources?

Certainly you believe that an economy at full employment is fundamentally different than an economy at 10% (or more) unemployment?

William L. Anderson said...

If the opportunity cost of using a factor is zero, then there is no payment necessary to the owner of the factor. Zero opportunity cost means that the factor is not scarce and, thus, does not have to be paid in order to be employed.

So, if we are paying factor owners of "idle" resources for their use, then by definition, they are not scarce. That is just basic economics, but I guess that having a Nobel means that one can make up new economic laws. (However, I have not seen any physics Nobel winners claim that they can circumvent the Law of Gravity.)

Anonymous said...

Professor, there are currently college graduates working FOR FREE in the hopes this will lead to jobs. See this article for instance: http://www.time.com/time/magazine/article/0,9171,1977130,00.html

Also, I had thought cost and opportunity-cost, while related, weren't always the same. In particular, I had thought part of what made recessions worse is that wages and prices are both sticky. I think the ideas it that if I own a factory, and used to charge people X to use that factory, I'm still going to try to charge X to a new client even though the factory is sitting empty. Am I wrong on this?

Also, is an economy with 10% unemployment different than one with full employment?

Pete said...

"If the opportunity cost of using a factor is zero, then there is no payment necessary to the owner of the factor. Zero opportunity cost means that the factor is not scarce and, thus, does not have to be paid in order to be employed."

"So, if we are paying factor owners of "idle" resources for their use, then by definition, they are not scarce. That is just basic economics, but I guess that having a Nobel means that one can make up new economic laws. (However, I have not seen any physics Nobel winners claim that they can circumvent the Law of Gravity.)"

Bah! This all presumes that the individual has a right to dispose of his own property as he sees fit.

What's righteous and pure is that if the individual resource owner isn't consuming his resource, either for himself or in some productive process, if there is no "motion" with that resource, then something is "wrong" with the economy. Didn't you know? ALL resources ALWAYS have to be in motion. The government should print and spend as much money as is necessary so that all resources and people are "moving" again. No, it doesn't matter for what purpose. What matters is means, like labor and production, and not ends, like consumption in accordance with individual values. Means are more important than ends.

If someone is planning on selling his idle resource in the future, then it doesn't matter. The government ought to destroy the purchasing power of his cash holdings, and his nominal income, to coerce him into doing "something" sooner rather than later. Politicians need taxes now! They can't collect as many taxes if people aren't utilizing some means for some purpose that involves money exchanges!

No, don't give me any crap about "the free market." Clearly we have a free market and clearly there is high unemployment and idle resources. That means the government has to step in and print and spend. Only a dogmatic biased partisan agenda driven hack could possibly think otherwise!

American Patriot said...

To Keynesians out there:

Malinvestment = Solyndra type investments, which there are dozens of where billions are poured down the toilet in return for absolutely nothing.

Newsflash: Even the Brits are now realizing it. They just decided not to subsidize solar projects anymore. Maybe Obama and company will wake up also? Don't bet on it!

Bob Roddis said...

Pete:

As AP "Hut Tax" Lerner would say, your problem is that you have an ideology.

Unlike the folks who understand the operational reality of the proven necessity of endless government debt to allow people to "save".

LK said...

"William L. Anderson said...

I tend to agree with Roberts. Aggregate demand is fictitious, just as is aggregate supply. The idea that we can add all the demand for goods and services and add the entire supply of goods and services and put them into two equations is a howler. "


Kiss goodbye to Say's law, then.
You have rendered Say's law in any form meaningless.

"As for "idle resources," we have to ask why those resources are idle in the first place. "

That is not an answer to the question: "what if resources will just sit idle until government uses them?"

"To a Keynesian, there is no such thing as a malinvestment. That is why they really cannot even speak of financial bubbles, "

What absolute garbage. One example: have you ever read Steve Keen's DebtWatch site? No?

Ever read anything by Hyman Minsky?
By Dean Baker?

For god's sake, even New Keynesians like Robert Shiller have done exteensive work on bubbles.

Bob Roddis said...

I've read some Steve Keen and Minsky and Baker. Where do they address basic Austrian concepts?

Somewhere (the left wing "Meltdown" book, I think) I have a quote from Baker about how the Fed needs to dilute the money supply to help lower US prices. Without the victims knowing what hit them, I presume.

Minsky writes:

The readily observed empirical aspect is that, from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes the economic system's reactions to a movement of the economy amplify the movement--inflation feeds upon inflation and debt-deflation feeds upon debt-deflation. Government interventions aimed to contain the deterioration seem to have been inept in some of the historical crises.

http://www.levyinstitute.org/pubs/wp74.pdf

Well duh. Funny money loans and spending distort the price, investment and capital structure. But Minsky is oblivious to the Austrian truth that this is all caused by funny money distorting economic calculation.

Keen has some interesting things to say about too much private debt, but where the heck do those loans comes from in the first place? Certainly not from tight-fisted savers looking for good investments in an inflation-free long term economy.

All three avoid the big ass elephant in the room, funny money.

Pete said...

LK:

Kiss goodbye to Say's law, then.

Say's Law doesn't add all the demand for goods and services and add the entire supply of goods and services and put them into two equations.

Say's Law is a logical argument that general overproduction is impossible.

That is not an answer to the question: "what if resources will just sit idle until government uses them?"

In order to answer THAT question, we have to ask why those resources are idle in the first place.

Yes, you want so badly for the government to print and spend money at every opportunity, and you will refuse to even consider that maybe that had something to do with the fact that the resources are idle. Merely ignoring the causes, and pretending that government printing and spending of money are the cure, is exactly the mental trap that actual economists like Anderson want to avoid.

What absolute garbage. One example: have you ever read Steve Keen's DebtWatch site?

Steve Keen rejects the Austrian concept of malinvestment.

Ever read anything by Hyman Minsky?

By Dean Baker?

Both Minsky and Baker also reject the Austrian concept of malinvestment.

For god's sake, even New Keynesians like Robert Shiller have done exteensive work on bubbles.

For God's sake? Oh that's convincing. It's for God's sake! That means your previous fallacious claims that Keen, Minsky, and Baker accept the Austrian concept of malinvestment, are somehow pre-validated!

Anderson was speaking of the Austrian concept of malinvestment, not bubbles fostered by "a sort of interpersonal contagion" which in other words means "I don't know".

American Patriot said...

LK:
"what if resources will just sit idle until government uses them?"

Now that is a silly question. As I have said several times here, if the resources are idled, it is because the investment environment is not condusive for those resources to be put to use. When the government uses them, they simply flush them down the toilet.

But then again, I forget that you think government is wiser than the markets in utilizing resources; and that is why the former Soviet Union and similar countries where economies were and are planned are such successes, right?

William L. Anderson said...

Now, now. Don't go knocking the USSR (or North Korea or Cuba). They have or had FREE MEDICAL CARE! Don'cha know that FREE MEDICAL CARE expunges everything else that has been wrong with those countries?

I remember seeing a Marxist professor at the University of Tennessee at Chattanooga praising Romania -- Romania! -- as having a better economy than the USA because "there is no unemployment there." That's right, dirt-poor Romania, the place with the infamous orphanages and grinding poverty.

That is the socialist mind, folks.

Anonymous said...

"What Krugman is saying here is that it does not matter if government blocks efforts of entrepreneurs and private business firms because, after all, government can easily replace the private economy through massive spending, financed by borrowing and monetary "creation." Thus -- and his logical construct really stretches credulity here -- if someone makes the claim that cutting military spending is bad because it eliminates certain jobs, that is "proof" that massive government regulations and control do not have any kind of negative effect."

I have no idea how you arrived at that conclusion. That isnt anything he was saying in that quote.

He was saying that 'job creators' claim' that any hint of antibusiness sentiment will actually hurt their business, which is bullshit.


Somehow you turned that into "government can spend whatever it wants in a liquidity trap."

In fact, that statement just proves that you dont even know what a liquidity trap is, or really much of anything at all.

Bob Roddis said...

Here’s the brilliant Dean Baker from the leftwing book “Meltdown”, pages 129-130 who advocated “pushing down the value of the dollar“ in 2009:

"Tax cuts directed at low and moderate-income families are a good way to jump-start the economy, as would be government investment aimed at neglected infrastructure needs, such as re-building New Orleans and preventing the collapse of more bridges. Pushing down the value of the dollar should also be a top priority.There is no way to correct our trade imbalance with an overvalued dollar providing a massive subsidy for imports and imposing a tariff on U.S. exports. A lower dollar will make U.S. manufactured goods far more competitive in the [p.130] world economy, and will thus create a large number of relatively high-paying jobs. One benefit of the housing meltdown is that it should be much easier to get our trading partners to go along with a lower dollar now that we can show them how much money they lost by investing in U.S. financial assets that have gone had.

Finally, we must get people on the Federal Reserve Board who take financial bubbles seriously. Greenspan recently asserted that "the human race has never found a way to confront bubbles." But it is possible for the Fed to do so, most obviously by repeatedly and publicly warning against stock, housing or other market bubbles as they arise. This would educate even the stupidest hedge fund managers, or at the very least make them fear personal liability for mismanaging billions of dollars. Clearly, Greenspan was not up to the job. We will need more qualified people running the Fed in the future."


They see themselves as Gods. There is no debating with them.

LK said...

"Bob Roddis said...

Here’s the brilliant Dean Baker from the leftwing book “Meltdown”,"


A quotation which shows Anderson's statement that Keynesians "cannot even speak of financial bubbles" is utter, unadulterated rubbish.

William L. Anderson said...

No, LK. Keynesians hold that there are no malinvestments, or that malinvestments cause no problems. There only are idle resources.

A bubble is the very definition of a malinvestment, but if malinvestments really don't matter, then neither do bubbles. Do the logic. Just because Krugman speaks of bubbles does not mean that his analysis is consistent with what else he is claiming.

Keynesians have called for MASSIVE stimulus policies. Do they truly believe that injecting huge amounts of money into the system will NOT lead to ANY malinvestments? Apparently not.

I rest my case, folks.

LK said...

(1) You have clearly retreated from your absurd statement that Keynesians "cannot even speak of financial bubbles".

(2) Keynesians hold that there are no malinvestments, or that malinvestments cause no problems.

That is nonsense. The notion of disequilibrium - the rejection of neoclassical equilibrium as a real world state by Keynesians - presupposes that the private sector cannot foresee will prefect
knowledge what to produce so that markets will clear. Malinvestment is presupposed.

(3) A bubble is the very definition of a malinvestment, but if malinvestments really don't matter, then neither do bubbles.

All based on the nonsense claim that Keynesians deny the existence of malinvestments. See (2)

(4) Keynesians have called for MASSIVE stimulus policies. Do they truly believe that injecting huge amounts of money into the system will NOT lead to ANY malinvestments?

What a ridiculous straw man.

No doubt there will be some waste and malinvestment, as in any private sector investment. The malinvestments will be minimal compared to the appalling waste of mass unemployment and foregone wealth an economy with very high unmeployment faces, if it is not stimulated back to high employment.

No one said that stimulus has to be utterly perfect. If the existence of even some malinvestment was an sufficient argument against public stimulus, it would also apply equally to all private sector, decentralised investment activities, which frequently produce malinvestment.

Pete said...

You have clearly retreated from your absurd statement that Keynesians "cannot even speak of financial bubbles".

Keynesians cannot speak of financial bubbles other than "financial instability" and "animal spirits" which is to say they don't know.

The notion of disequilibrium - the rejection of neoclassical equilibrium as a real world state by Keynesians - presupposes that the private sector cannot foresee will prefect knowledge what to produce so that markets will clear. Malinvestment is presupposed.

That's not malinvestment.

That's specific mistakes made by specific entrepreneurs/investors and they incur losses. Other specific entrepreneurs/investors make correct decisions, and they earn profits.

Malinvestment concerns why most investors/entrepreneurs would suddenly be making errors all at the time time, even though they are in very diverse industries.

All based on the nonsense claim that Keynesians deny the existence of malinvestments

No, Anderson is not claiming that Keynesians deny the existence of bubbles. Only efficient market hypothesis types deny bubbles.

What Anderson is saying is that Keynesians don't understand malinvestment. They only see drops in aggregate demand.

No doubt there will be some waste and malinvestment, as in any private sector investment. The malinvestments will be minimal compared to the appalling waste of mass unemployment and foregone wealth an economy with very high unmeployment faces, if it is not stimulated back to high employment.

False. You're again ignoring opportunity costs and the law of scarcity, and you're again ignoring WHY there are idle resources and high unemployment in the first place. You can't just blithely declare ex cathedra that gains can be made if the government just prints and spends money to get people back into "employment", doing what the government wants. For you would be ignoring the fact that the idle resources and high unemployment are in large part due to the very cure you're not currently advocating.

The only gains that can be made are voluntary exchanges, which are geared towards producing eventual consumer goods and services.

No one said that stimulus has to be utterly perfect.

No one said that Keynesians think deficits and inflation are "utterly perfect."

We're just saying that Keynesians fallaciously believe that deficits and inflation are *superior* to the free market process.

If the existence of even some malinvestment was an sufficient argument against public stimulus, it would also apply equally to all private sector, decentralised investment activities, which frequently produce malinvestment.

Nonsense. The costs and losses of bad investments in the private sector are localized to those individuals involved, not the entire population of taxpayers. The costs and losses of bad spending choices made by government, are dumped on those who were not involved, namely, the taxpayers.

There is no "malinvestment" in the free market. Malinvestment is a general event of most entrepreneurs/investors in different industries making bad decisions all at the time time. Malinvestment is not one individual entrepreneur making a bad decision and incurring losses.

Pete said...

A quotation which shows Anderson's statement that Keynesians "cannot even speak of financial bubbles" is utter, unadulterated rubbish.

Utter, unadulterated, total, complete, unequivocal, nonsense.

It's true that Keynesians cannot even speak of financial bubbles. Keynesians can only speak of aggregate demand falling and animal spirits.

Keynesians are those who adhere to Keynes' theories.

Show us where Keynes wrote in detail on the causes and cures of financial bubbles, other than his famous passage of "animal spirits."

ekeyra said...

LK,

"If the existence of even some malinvestment was an sufficient argument against public stimulus, it would also apply equally to all private sector, decentralised investment activities, which frequently produce malinvestment."

Once again you forget who bears the costs of those malinvestments. The cost of private malinvestments are beared by those who made the decisions and took the risk, if they pay off they are free to enjoy the fruits of their labor, if they dont, they are hopefully wiser for the experience, and if not, deprived of capital with which to make more bad decisions.

However, in a public malinvestment, the decision makers are putting at risk resources that are not theirs and had no part in obtaining. They bear no personal risk or liablity, and even after catastrophic failure are usually rewarded with a bigger budget, which means taking an even larger chunk of resources from the people who earned it.

If i can pole holes in your logic you need to rethink your strategy.

I am also amused at the rant about prof anderson not comprehending liquidity traps. Its the equivalent of ranting that one is not familiar with the size, shape, and particualar aroma of unicorn shit.

Bob Roddis said...

LK still does not understand the concept of economic calculation and he supposes that government officials are inherently omniscient and benevolent. That’s the problem with all of our opponents of all stripes. You simply can’t argue with someone who holds fast to such preposterous and infantile beliefs.

Further, there is no evidence that a free society suffers inherently from unemployment or that massive violations of common law notions of private property, contract and due process of law mandated by Keynesian “stimulus” must be committed to solve this non-existent problem. The problems faced by mankind are almost entirely problems of personal safety where people are not protected by common law notions of private property, contract and due process of law, thanks in no small part to the roll of the pseudo-intellectual hip socialists and Keynesian "progressives".

Bob Roddis said...

The malinvestments will be minimal compared to the appalling waste of mass unemployment and foregone wealth an economy with very high unmeployment faces, if it is not stimulated back to high employment.

There is no "economy" as a mechanical thing and it cannot be "stimulated back to high employment".

There are human beings and scarce resources. People exchange scarce resources. If the resources are not scarce, they can be obtained without exchange. The terms of the exchanges (prices) provide the essential information regarding the relative scarcities and wants in the world. There is no other way. Government intervention, especially socialism and Keynesianism, inferfere with that essential information process.

It's pointless to argue with people who don't understand that and none of our opponents understand it sufficiently to even begin a refutation.

LK said...

"The cost of private malinvestments are beared by those who made the decisions and took the risk"

That is rubbish. Human beings in general also bear the cost of failed private sector investments, in the oppurtunity costs of lost productive investments that would have increased output and made everyone richer.

If private sector agents have caused a bubble resulting in debt deflationary collapse and depression, vast numbers of other people pay too.

Hoist on your own petard.

lew said...

Keynesians have a simple hydraulic model of economic activity, relatively static.

The actual economy is a system whose interacting subsystems are complex beyond human comprehension.

Every day, 10s of 1000s of economic decisions are made by individuals and organizations using spreadsheets with 'net present value' calculations. Changing the rate of inflation can convert all of those decisions from good to bad.

It is as if the inflationists think we can improve the housing industry by shrinking all of the rulers and tape measures at the same time.

Bob Roddis said...

If private sector agents have caused a bubble resulting in debt deflationary collapse and depression....

A big "if". But they don't.

ekeyra said...

LK,

"Human beings in general also bear the cost of failed private sector investments, in the oppurtunity costs of lost productive investments that would have increased output and made everyone richer."

Thanks for the A+ lesson in circular logic.

First of all,"human beings in general", do not create wealth simply by existing, and therefore have no such claims to the loss of productivity lost in private malinvestments.

Second, and you should know this by now, private losses are essential to creating wealth. Profits and losses are signals as to what "human beings in general" value most and what "human beings in general" value least. A private malinvestment is still a net gain to "human beings in general" because it signals that resources should not continue to flow to a commodity that "human beings in general" do not value enough to make its production profitable. Private losses are the very foundation of future productivity. Start thinking fourth dimensionally.

Additionally, extrapolating your logic to its inevitable conclusion, noone should be allowed to make any decisions, lest they be the wrong ones and cost all of humanity dearly. How dare someone order a dish they've never tried, decide they dont like it and throw it away. Why someone else was starving while you were frittering away everyone's food with your decisions.

Suppose I could cure cancer, but instead I choose to smoke pot and play video games all day. Are you really going to posit that you have some right to the contents of my mind because you feel im wasting it?

ekeyra said...

Hoist. Petard. You get the idea.

Pete said...

LK:

Human beings in general also bear the cost of failed private sector investments, in the oppurtunity costs of lost productive investments that would have increased output and made everyone richer.

The crucial difference being that when price investments fail, only those directly involved in the investment incur losses, as opposed to failed government spending, which hurts THE ENTIRE AMERICAN POPULATION through taxation and/or lost purchasing power through inflation.

Cripes, by your logic, if some "people" can get harmed by torture, or murder, then nobody should complain if it was expanded to whole populations.

Xerographica said...

Ok, so here's a compromise. The question is...which side of the debate would be more willing to accept this compromise?

The compromise is to allow taxpayers to directly allocate their individual taxes. This would force taxpayers to consider the opportunity costs of their tax allocation decisions.

Logistically speaking...at anytime throughout the year taxpayers could directly submit their taxes to, for example, the Environmental Protection Agency. The EPA would then send notice of payment to the IRS. Taxpayers would still have the option just to submit all or some of their taxes to congress (aka their public goods "personal shoppers").

Here are a few blog entries that I've written on the subject...The Opportunity Costs of Public Transportation, The Opportunity Costs of War, The Opportunity Costs of Public Goods and The Ostrich Response to Pragmatarianism.

The Keynes camp would get their spending and the Hayek camp would get their allocative efficiency (relatively speaking).

On a scale of 1-10 (1 = no support, 10 = total support) please indicate how willing you would be to accept this compromise. Don't forget to mention which camp you're in.

macroman said...

"all government spending depends on government choices?"???? I don't think so. A government could use helicopter money so the recipients were selected at random. The government could choose to give every adult citizen a 1000 dollar check (as Australia did in 2008) and then the citizens make all the choices about spending. Australia followed up with a spending package, government choices, they chose schools and domestic solar panels. And Australia avoided the recession. Yes I know, maybe it will be worse in the long run, but the evidence so far is that it worked OK. But this may be the result of china,s Stimuls package, not Australia,s. food for thought.

macroman said...

Xero, I guess I am in the Keynesian camp (well not the tautological Austrian camp) I accept your proposal with score of 8/10. I still wonder if people will volunteer to spend enough on some government supplied basics, like defense or police or law courts, but maybe we could personally allocate 80 percent of our taxes, or 50 percent and see how it goes.

macroman said...

A question for all Austrian economists from Bryan Caplan. Is it Is rational for the market to be fooled into malinvestmebt by an increase in money supply, say an increase in bank loans? Is the market stupid or what? Glad to hear the Austrian response, I am sure there must be one.

Xerographica said...

macroman! Thanks for your thoughts on the compromise. Any idea why you're the only one to respond?

That's really interesting that you're in the Keynesian camp yet you recognize some value in the compromise. I wonder if it's a coincidence that it was a progressive who wrote this excellent article on tax choice...Your Money, Your Choice.

The author of that article, Cait Lamberton, did a study on allowing taxpayers to allocate a portion of their taxes and found the results to be positive. Allowing people to directly allocate even 10% of their taxes would be better than nothing...but I'm fairly confident that defense or police or law courts would be adequately funded. Conservatives and libertarians would see to that. In essence we'd end up with a taxpayer division of labor.

Do you have a link to any webpage on that Australian program where they gave every adult citizen a 1000 dollar check? I'd be interested in reading more about it.